In three months,
everything has changed. Whilst in June we saw only
headwinds, now everything seems resolved, and the sky
is blue once again. This is the story being told by the
market, but we do not share this view. We recommend a
cautious stance.

It is true that we
received positive news in September. First, Germany's
constitutional court rejected a call to block a
permanent Eurozone rescue fund, clearing a key hurdle
towards resolving the debt crisis. Then, the Dutch
Prime Minister, Mark Rutte, won in a close race after
voters backed pro-European parties, dispelling fears
that more extreme groups and Eurosceptics were gaining
ground in the Netherlands, and the wider Eurozone.
Finally, the ECB announced the Outright Monetary
Transactions (OMT) policy.

Of course, it is
important to have a plan, but now execution will be
critical. Europe has articulated a set of policy
responses to the debt crisis, but will now have to
follow through on three key issues: 1) the EFSF/ESM-ECB
bond buying plan, 2) bank union, and 3) Greece. Another
key milestone will be whether Spain will ask for
support under the programme. In addition, investors may
be placing too much faith in the ECB, and in the
ability of governments to cope with their fiscal
problems in a 17-nation bloc still lacking economic
union.

While important as a
signal of intent, the economic impact of these moves is
questionable. While authorities intervention has
once again supported risk assets, the underlying issues
that Europe faces are unchanged. The Euro crisis has
pushed the worlds second largest economic region
into recession and the recent ECB announcement will not
reverse this trend in the short or medium-term,
especially when elsewhere in the world, other concerns
are rising.

The Chinese economy is weakening. Cement prices,
which are a good indicator of the pace of growth in
the Chinese economy, were down 4% in August and 26%
year to date. Chinas slowdown has had
repercussions elsewhere around the region.

Brazilian exporters reported some improvement,
benefitting from a weaker Real, but their performance
is still down vs. 2011, mainly due to lower commodity
prices. Brazilian financials also showed weak
performance reflecting a slowing economy and rising
non-performing loans.

A firming in global consumer spending can be
attributed partly to the recent sharp fall in global
inflation. In the three months ending in July, global
consumer prices are estimated to have risen at an
annualised 1% - the lowest rate in over three years.
However, the recent jump in food and oil prices is
likely to dampen purchasing power, and push down
global consumer spending growth.

In the best case
scenario, growth will stabilize at a below trend rate,
neutralizing some of the negative economic momentum
which had boosted bonds earlier in the summer.

Our analysis suggests
that economic momentum is still somewhat to the
downside. As a consequence, for investors having a time
horizon of 12 to 18 months, we would recommend using
any rebound in top quality 10 year government bonds to
lengthen the duration of their portfolios.

You will find full
details in our 2012 Q4 Strategy published tomorrow.

Macro Focus

United
States

Manufacturing in the
Philadelphia region shrank for the fifth consecutive
month in September. The Philly Fed index was published
at minus 1.9.

This week we had two
additional signs that the housing market has gained
traction in the second half of the year. First, the
purchases of previously owned houses increased 7.8% to
a 4.82 million annual rate, a two-year high; second,
new housing construction rose 2.3% in August to a
750,000 annual rate.

Euro
Zone

Euro-area services and
manufacturing output fell to a 39-month low in
September. A composite index based on a survey of
purchasing managers in both industries in the 17-nation
euro area dropped to 45.9 from 46.3 in August.

The German business
confidence fell to the lowest in more than two and a
half years in September. The IFO index dropped for a
fifth straight month to 101.4 from 102.3 in August.
This is the lowest reading since February 2010.

Greece's budget deficit
is 20 billion, much more than previously
estimated.

United
Kingdom

Retail sales fell in
August as the Olympics distracted shoppers and internet
shopping plunged the most in almost five years. Sales
including auto fuel declined 0.2% from July.

The manufacturing index
increased more than forecasted in September. The gauge
of factory orders rose to minus 8 from minus 21 in
August.

Britain posted its
biggest August budget deficit on record as the
recession hit tax revenues and pushed up spending on
welfare. The shortfall excluding government support for
banks was 14.4 billion pounds.

Bank of England policy
makers voted unanimously to maintain their
bond-purchase target as officials differed on the need
for more stimulus in light of growing inflation
risks.

Add Your Comment

All fields are compulsory

All comments are subject to editorial review as we are subject to the same regulations adhered to in publishing our own content. For this reason, your comment may not be live immediately, or may not be published.

Magazine

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies Policy before using this site.